Contrary to the thoughts of Valuentum, Dell's (DELL) fourth quarter earnings report is indicative of a longer term trend that has been forming for a handful of quarters now. This trend will cause Dell to struggle as PC sales continue to depreciate. It is not a surprise that PC shipments are declining because Europe's economy is slowing down and tablets are moving in on the PC market. Also, Hewlett Packard (HPQ) is indicating the PC market is stalling. And, since a quarter of Dell's revenue comes from desktop PC's, if the market continues to contract, Dell's share price will struggle.
It is important to begin with some of Dell's basic financial trends. In fact, I will begin with two positives. The first is a breakthrough in revenue. Prior to the firm's fourth quarter, revenue was unable to increase over $15.6 billion anytime in the past year and half. Secondly, servers and networking revenue has increased 20.4% over the past five quarters. These are strong results that should be applauded, but two detrimental trends can be spotted after reviewing the financial sheets.
The first trend is an increase in spending to produce more revenue. More specifically, operating income and net income have decreased substantially. This is important because it indicates that, at the current moment, Dell is either doing one of two things. The first possibility is Dell is simply increasing spending in order to increase revenue. On the other hand Dell may be going through a temporary increase in spending in order to produce higher revenue and higher margins in the future. It is difficult to make a hard and fast conclusion at this point in time. But the later option will lead to higher margins; hence an increase in the share price over the long term.
Nevertheless, what can be said for a fact is that the PC industry is stalling. There are two important reasons for this. The first reason is tablets are becoming more popular. As consumers begin to realize tablets can perform many of the same tasks as a PC without the bulkiness, we will see this trend continue. The second, and more important reason is the economy in Europe and parts of Asia are slowing down. Therefore consumers are not willing to purchase normal goods, such as PC's, because these items can last a long time before consumers need a new one. As this trend continues, we will likely see Dell and HP continue to struggle.
HP faced a severe decline in PC sales. More specifically, notebook and desktop units shipped decreased 18% and 19% year over year, respectively. In fact if not for the decline in desktop and notebook sales, HP's total revenue and Personal Systems Group PSG revenue would have been more respectable. If the PSG unit would have broken even with last year's numbers, total revenue would have been $31.335 billion and PSG revenue would have been $10.23 billion. Both of which would have caused a spike in the share price.
Unfortunately this did not happen, and all the would haves and could haves in the world will not change the fact that HP's PC unit is struggling due to the tablet and economic reasons listed above. More importantly, this trend is signaling Dell is likely to suffer future losses; unless the servers and networking unit can make up the difference. Keep in mind Dell's desktop PC revenue was within one positive standard deviation of the past six quarters. This indicates PC revenue is close to the mean sales over the past six quarters. This means that, while there was an increase, fourth quarter PC sales were not strong enough to deviate from the mean by any significant amount.
Another interesting concept Valuentem brought up is the release of Windows 8. This would normally be a strong catalyst for the stock, but if the economy continues to weaken in Europe and Asia throughout 2012 we will not see the full effects of this until long after Windows 8 is released. And, as mentioned above, if the economy weakens the bulk of consumers will not purchase a new PC; especially since Windows 7 is already a fantastic operating system. Of course, it is important to keep in mind that Apple's (AAPL) products are incredible as well, yet consumers do not hesitate to purchase the newest edition.
Nevertheless, with demand decreasing in the PC industry, it may be a safer investment decision to avoid Dell in the near to medium term. Until we can see more data to determine which direction Dell's PC sales will go, Dell should be termed a speculative stock. However, this can change quickly if Dell's PC sales increase during the current quarter. It is also important to note the HP aspect. Investors can watch HP and other competitor's PC sales to determine which direction Dell will go. But for now, Dell, and HP for that matter, should not be medium or long term stocks to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
